How to Audit Prolongation Costs

On our Claims Class courses we explain that it is important to substantiate everything in a claim document. This also applies to the calculation of prolongation costs.

Such a claim should include:

  • A list of time-related resources: staff, non-productive labour, plant, vehicles, equipment, site buildings, etc.)
  • Energy costs: electricity, water and diesel for time-related plant and equipment
  • Bonds, guarantees and insurances
  • Each item contained in the lists above should be supported by invoices and payroll records to substantiate the individual costs
  • Each item should be supported by a calculation to demonstrate how, for example, a monthly cost has been converted to the daily cost.

Small Project, Short Delays

If the project is relatively small with a limited number of resources and if the delay period is fairly short it would be relatively easy to provide this information within the claim document.

I usually include spreadsheet calculations, in bill of quantities format, in an appendix to calculate the total daily cost and then multiply this by the delay period claimed.

I also include a separate appendix or appendices for invoices to substantiate the costs included in the spreadsheet calculations. I will usually add a handwritten calculation these documents to show how the daily cost has been calculated. Each document here is given a reference and the reference is included on the spreadsheet so the costs to be easily verified.

Large Project, Extensive Delays

What if the project is large with many resources deployed and the delays are extensive? To substantiate the costs there is likely to be a large amount of paperwork to include. This would be a very difficult and time-consuming task.

However, there is an easier way…and I’ll use a personal example.

I was working on a very large project and I was called to assess the contractor’s claimed costs over long delay periods.

The contractor submitted calculations of the time-related costs, but these were unsubstantiated at this stage. We reviewed the items included within the calculations and we met to discuss them.

During discussions, we agreed that several of the claimed cost headings were not time-related. It was also agreed that some costs had been claimed in full whereas only a proportion could be considered as being time-related. For example, diesel for the site generators. Some of the energy was used for productive plant and could therefore not be considered not time-related – it was just consumed at a different time than planned. Other energy though, was used for site accommodation, lighting etc. and was time related. In such instances, we agreed a percentage of each monthly cost for inclusion within the claim.

The contractor then revised his calculations to take into account the various things we agreed.

I then conducted an audit at the contractor and MEP subcontractor’s offices where the accounts were kept. The audit consisted of spot checks on the resources claimed. For example, if the contractor had claimed for ten site management and administration staff, I checked the records to see if ten were actually present on site at the time in question. Once I had checked the resources, I carried out spot checks on the costs of the resources verified by asking the contractor to produce payroll records, invoices, calculations of depreciation costs, etc.

I usually carried out spot checks on the high cost items based on the 80/20 theory that 80% of the total costs will be contained in 20% of the total number of line items. The audit revealed only a few errors, so I was satisfied that the costs were reasonably accurate. The contractor resubmitted his calculations with the errors corrected and these were subsequently used in the prolongation cost award.

If the audit revealed a substantial number of anomalies or errors, or if the contractor had been unable or unwilling to provide substantiation, I would have rejected the claim and requested the contractor to revise and resubmit it and repeated the process. Usually, when contractors realise that their calculations will be stringently audited, they will make a better effort the second time around.

I have experienced some situations where the party responsible for checking the claim will want every cent to be substantiated and justified. To me, this is an unreasonable stance to take and will only serve to prolong the matter to no one’s benefit. We must remember that the standard of proof required in civil proceeding is ‘on the balance of probabilities’ and not ‘beyond reasonable doubt’. An audit in the example here may not check every singe item but, if it is demonstrated that the contractor’s calculations are correct to a reasonably large extent, then they should be accepted.

One last thing…

It is one thing for you to be satisfied, but you may also need to convince the employer or his internal auditors that you have carried out your duties in a proper manner. Bearing this in mind, I created audit sheets where I recorded each audited item. I also obtained copies of the records provided during the audit. In this way, I can, if necessary, produce a full audit trail or answer any questions that may be raised.

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